Most traders rely on technical analysis to profit in the financial markets. With so many chart patterns and indicators, it’s easy to get lost in the weeds when developing a trading strategy. A common oversight is looking at a single timeframe for both the trend and specific entry and exit points—but you risk not seeing the forest through the trees.
Let’s take a look at how multi-time frame trading analysis can help you better identify trends and trading opportunities in the crypto market.
What is Multi-Time Frame Analysis?
Multi-time frame analysis is the process of viewing the same asset under different timeframes. For example, a swing trader might use a daily chart to see the long-term trend and then a 4-hour chart to find specific entry and exit points.
The optimal timeframes for identifying trends and entry points depend on the type of trade and holding period. As a general rule, traders should use a ratio of 1:4 or 1:6, such as a 1-hour chart for entries and a 4-hour chart for spotting the trend.
While it’s possible to use more than two timeframes, the added complexity creates diminishing returns when it comes to realizing tangible benefits. Most traders should stick to two-time frames when starting out and perhaps expand to a maximum of three if they need it.
Suppose that you’re a swing trader that prefers to look for entry or exit points on a 4-hour chart. Rather than using just the 4-hour chart, you might start by looking at the daily chart to get a sense of the trend—after all, ‘the trend is your friend’ in trading!
You see that the daily chart shows a bullish uptrend, which means that you may want to maintain a bull bias when looking for 4-hour opportunities. In other words, you might only look for long trades for the day to increase the odds of a successful trade.
In addition to seeing a high-level trend, you may notice an ascending triangle chart pattern on the daily chart and use the trendline price levels as key areas of support and resistance that may not be nearly as obvious on the 4-hour chart.
How To Use Multi-Time Frame Trading?
There are a couple of ways to use multi-time frame trading analysis.
Many traders simultaneously display two charts in separate windows or monitors. That way, they can quickly reference the long-term trend before entering or exiting short-term positions. The ability to see across multiple time frames is one of the main reasons that professional traders use multiple monitors at their trading stations.
You can also look at technical indicator values across multiple timeframes. For example, the relative strength index on a 1-day chart may be bearish at the same time that the RSI on a 1-minute chart is bullish. You might therefore look at the 1-day RSI value (rather than the entire chart) to determine the direction of your trades on the 1-minute chart.
Some software solutions simplify multiple time frame analysis trading. For example, some technical analysis platforms let traders see trend lines and technical indicators from multiple timelines on the same chart. Python also provides technical analysis tools that you can use to build custom directional indicators leveraging data across multiple timeframes.
Considerations For Crypto Traders
The crypto markets are similar to conventional assets, such as stocks or forex, but there are some considerations that traders should keep in mind.
Some crypto assets have less liquidity than stocks or forex, which means that some timeframes will not be very useful. For instance, an asset that only trades every few days doesn’t have a very useful 1-minute or 1-hour chart. Traders should keep liquidity in mind when selecting the right crypto assets for their trading style and use MTFA accordingly.
Crypto assets can be event-driven in some instances, such as when hard forks or algorithm changes take place, which can throw a wrench in any technical analysis. You should always be aware of upcoming event-driven risk factors and potentially stay out of the market if you don’t want to take the added directional risk.
The Bottom Line
Multi-time frame analysis trading can help you spot longer-term trends before finding nearer-term entry and exit points. You can use multiple time frame analysis by opening two charts side-by-side or by using indicator values to compute a directional bias for trades. Of course, it’s important to keep in mind the common pitfalls before using MTFA in practice.
While multiple time frame analysis may be an under-appreciated technical analysis technique, crypto taxes are an under-appreciated risk and opportunity for traders. Crypto taxes are significantly more complex than conventional financial assets and the IRS has begun to crack down on traders that fail to report their capital gains.
Taxes also present an opportunity for crypto traders. Since crypto assets aren’t subject to the same wash rules as conventional financial assets, there are many more opportunities to harvest tax losses to offset capital gains elsewhere or even ordinary income. The key is finding these opportunities amid the complexities of crypto trading activity.
If you’re a crypto trader, ZenLedger can help you identify ways to reduce your taxes through tax-loss harvesting. You can also use the platform to ensure that you’re accurately filing taxes with an audit trail in place in case you experience any IRS issues.